Nothing Seems to Have Changed after G20: Emerging Markets Curb Their Currencies

Many predicted the G-20 meeting wouldn’t change a thing, and it turns out they were right. As long as the U.S. continues on QE path, there may be no other alternative left for emerging economies. This ponzi game has to end at some point and countries have to live with its consequences.

From Bloomberg:

Finance chiefs from South Korea to South Africa signaled they may act to slow gains in their currencies, just four days after the Group of 20 vowed to soothe trade tensions in the $4 trillion-a-day foreign-exchange market.

Asian currencies fell to a one-week low after Bank of Korea Governor Kim Choong Soo said today that measures to mitigate capital flows could be “useful.” Hours later, the rand dropped as South African Finance Minister Pravin Gordhan said his government will use part of higher-than-expected tax revenue to build foreign reserves as it attempts to weaken the currency.

The shifts suggest G-20 members will keep trying to defend their economies from the slide of the dollar and capital inflows even after the group promised Oct. 23 to refrain from “competitive devaluation” and to increasingly embrace market- determined currencies.

“The G-20 made a vague pledge not to manipulate currencies much, but there was no mechanism to ensure that each country will not keep taking unilateral measures,” said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman & Co. in New York. “It’s every man for himself.”

“Although what came out of the G-20 meeting was better than expected, it didn’t really have any teeth in it,” said Kieran Curtis, a fund manager who helps oversee about $2 billion in emerging market debt at Aviva Investors in London. “There was still no framework laid out to deal with countries following an ultra-competitive exchange-rate policy.”

The concern of emerging market officials is that failure to counter gains in their currencies will mean exports are choked, removing a source of economic strength. Their exchange rates have risen as investors bet the Federal Reserve will next week introduce more so-called quantitative easing, a policy move which has hurt the dollar.

“The agreements reached so far don’t mean much in practice,” he said. “From the point of view of these countries, as long as the big countries are undertaking QE measures and looking out for themselves they don’t feel any obligation not to act too.”

http://www.bloomberg.com/news/2010-10-27/-every-man-for-himself-as-emerging-markets-curb-currency-gains-after-g-20.html